Paul's Web Blog

Archive for the ‘Financial Life’ Category

Finance Minister released the draft of Direct Tax Code (DTC) for public discussions in August 2009. CBDT (Central Board of Direct Taxes) released the Revised DTC discussion paper in June 2010 for inviting further comments on the modified proposals in DTC. Direct Taxes Code 2009 expected to become effective from 1 April 2011, shall replace India’s antiquated Income Tax Act, 1961, which is a major step in the direction of much awaited tax reforms in India and which aims to simplify the tax regime radically.

Let’s see what are the implications for the Senior Citizens in the original draft and the revised discussion paper on Direct Taxes Code

1. Income Tax Rates and Income Slab: In the revised discussion paper, finance ministry has not made any changes in the Income Tax Rates and Income Tax Slabs that were proposed in the original draft. That means there is no change in the basic exemption limit for the Senior Citizens (resident individual of 65 years or above), which is 240,000 per year. However, with the increase in the overall Tax Slabs (reduced tax rates), the net tax liability for Senior Citizens will work out to be lower than the present rates of income tax. Proposed Tax Slabs as per DTC are as under:

Income Exempt from Income Tax – up to 240,000 for senior citizens (resident individual of 65 years or above), up to 190,000 for women, and up to 160,000 for all the other assesses Income above the basic exemption limit up to 1,000,000 – Tax Rate 10% Income from 1,000,001 to 2,500,000 – Tax Rate 20% Income above 2,500,000 – Tax Rate 30%

2. Tax Incentives for Savings: In the revised DTC, there is no change in the limit of deductions from taxable income for savings in specified investments. In the original draft, the limit has been proposed to be revised to 300,000 from the present limit of 100,000 (under section 80C). However, it should not make much difference to the Senior Citizens, as the tax incentives for savings are basically meant for the youngsters (so that they can save for their retired life) and not for the retired persons who have to live on their savings of lifetime.

3. EEE and EET Regime: The modified discussion paper on DTC has proposed to continue with the existing EEE (Exempt-Exempt-Exempt) regime for specified investment schemes such as GPF (Government Provident Fund), PPF (Public Provident Fund), RPF (Recognized Provident Fund), Pension Scheme administered by PFRDA (Pension Fund Regulatory and Development Agency), Term Life Insurance, and Annuity Schemes. In the original draft, the ministry had proposed to adopt EET (Exempt-Exempt-Tax) regime. It is a great relief for the Senior Citizens, as they will not have to pay tax on their withdrawals from PF, or Pension.

4. Retirement Benefits: As per the revised DTC, the retirement benefits such as gratuity, commuted pension, voluntary retirement compensation and leave encashment will be exempt from tax subject to specified limits. Original Draft DTC had proposed a scheme of deferment of tax on retirement benefits, that is, the retirement benefits would not be taxed if it were invested in a Special Retirement Benefit Account, which would be subsequently taxed in the year of withdrawal. It is worth noting that in the earlier draft, the finance ministry had also proposed that Employer’s Contribution to Provident Fund, Superannuation Funds and Pension Schemes would be treated as income for the employees. However, the Revised DTC has done away with this proposal.

Summing Up:

In the New DTC, be it in the original draft or in the revised discussion paper, there is nothing very much special for the senior citizens except the higher income tax slabs and the corresponding reduced tax rates. If the basic exemption limit of 240,000 for senior citizens were revised substantially, it would have definitely been a great boon to the Senior Citizens.

Bank Coverage vs. Private Coverage. What you need to know!

So let’s get on to a mortgage insurance discussion. Did I say mortgage insurance? Ah yes! Yes, it’s a unique name given to normal, ordinary life insurance, couched under a very nice sounding name – which makes a whole lot of difference to people wary of “life insurance.” So, they’re not buying life insurance-no, no, they’re buying mortgage insurance. I wish there were many more such unique names for good old Life Insurance which would persuade people to buy life insurance and protect their loved ones and their estates.

Apparently, people do not want to talk about death; so life insurance is the last topic for discussion unless you get a close call from the Creator, by way of a heart attack or stroke. Mortgage insurance is not mandatory at your bank, or anywhere for that matter. All you have to do is sign a waiver and you’re off to the races. The waiver releases the lending institution of its obligations to offer you a plan that would take care of your family in the event you had a premature death.

Let’s get back to the statistics. Out of 1,000 people aged 30, 125 will die prior to the conclusion of a 25 year mortgage. And surprisingly, despite having this fantastic name to this very important plan there are thousands of families lacking protection and leaving their dependant families open to the risk of losing their homes. I am certainly glad that due to the plans aggressively marketed by the banks, many families are protected. Or else, there would be thousands of unprotected families who would end up homeless.

If a mortgage is not paid immediately, in the event of your death, it will become a huge liability to the family.

Choices: Let’s visit the choices your family would have to make in such a situation.

1. Will the surviving spouse/partner carry on the entire burden of the mortgage and will the bank accept the risk? If two incomes together found it difficult to make both ends meets, how can one income possibly be adequate?

2. The family could sell the house, relocate or rent somewhere else. Will there be a buyer for the house? What about the cost involved in selling the house? Will there be enough money after selling or will the family owe the bank?

3. Sell the house and move in with the relatives. Not the best alternative and how many people have philanthropic, generous relatives willing to take in another family? Not many, I can bet.

4. It’s an accepted fact that for most people their house is their most valuable asset and they protect it by way of mortgage insurance.

By the way, I’m sure you have heard this statement from a friend saying that someone they knew had died and that the surviving family does not have any money. You can immediately conclude that those folks did not have insurance and must have probably snubbed many insurance advisors like me. If one truly loves his or her family, a mere $15.00 a month can prevent such an eventuality.

o Why take advice from a bank official, whose experience is not insurance?

Before we discuss the nitty-gritty of the plans marketed by the banks and other lending institutions, let’s get one thing straight. Would you go to your dentist if you are ill? Or, would you go to your family doctor? True, both are doctors, but their lines of specialty are totally different. Why, then, would a person take advice from a bank official (whose expertise is banking and NOT insurance) to purchase protection of his/her most valuable asset?

Don’t get me wrong-bank officers may be extremely knowledgeable in the financial aspects of banking related issues, but insurance issues are far beyond their scope. They are only doing their duty by offering the mortgage plans available.

Therefore, getting advice and signing an extremely important document which can affect your entire family’s financial future is something you have to take really seriously. An Insurance Advisor, on the other hand, is qualified to give you better advice on insurance related issues.

o Plans offered by an Insurance Advisor provide coverage that remains level for the term you select.

Mortgage insurance plans offered by banks relate to your mortgage balance, and obviously as your mortgage drops so does your insurance coverage. In this case, if you are happy about reducing your mortgage, remember that the insurance company is equally happy because this reduces their liability.

Individually acquired plans are tailor made for you personally and so, if you are healthy, you get a better rate. Unfortunately, the plans that banks recommend are group plans. It does not matter how healthy you may be compared to others in the group.

o Plans we offer have premiums guaranteed and cannot be changed by the insurer.

As you might be aware, group plan premiums are generally not guaranteed. Mortgage insurance plans are group plans.

o Individual plans do not reduce their benefits and so the premium remains the same.

Mortgage insurance plans offered by banks relate to your mortgage balance, and as your mortgage drops so does your insurance coverage, as mentioned previously. However, the premiums that the bank charges you remain the same. Does this seem fair?

Most bank plans leave the insurance carrier with loopholes to decline your claim.

o Individual plans will require complete medical check-ups done by qualified medical professionals, at the time of application, which will save your beneficiaries from problems later. It also protects your interests and the interests of your beneficiaries at a later date. Qualified Insurance Advisors will coach you on most medical questions so that your answers are accurate and appropriate.

Most bank plans can be set up with a few condensed medical questions-which leaves your bank’s insurance carrier with loopholes to decline your claim.

o Our plans do not require you to pay additional PST. The premium offered is the final figure, no PST surprise.

Premiums quoted by group insurance plans do not include Provincial Sales Tax. Therefore, just like the rest of your regular purchases PST sneaks in silently to add to your total. So, when you shop for a price, please take this into consideration. A PST of 8% could buy you a lot of additional insurance coverage OR reduce your cost significantly.

With our plans, the premium offered is the final figure-no PST surprise.

o The plans offered by an Insurance Advisor insure both spouses separately, and so, insurance is paid on both deaths, for instance in a disaster where both the insured die, two separate death claims in the same amount will be paid, thus doubling the benefit.

Bank mortgage plans are “first to die” plans-i.e. the plans pay and cease when one person of the two insured dies. Obviously you would agree that that’s the purpose of this insurance. Sure. However, wouldn’t you prefer a better option?

For example: a 45 year old male and a 42 year old female insured for a mortgage of $250,000 “first to die” would pay $49.50 per month. By insuring them separately for two amounts, the cost would be about $52.00 per month. Wouldn’t you agree that it’s worth an additional $2.00 month to double the coverage, so that the beneficiaries receive $500,000? That’s the advice you will receive from a qualified insurance professional.

o The plans an Insurance Advisor offers can generally be converted to a permanent plan, without the necessity for further medical evidence. So if you develop a medical condition which would disqualify you for insurance, this feature would be of great importance in the continuation of your insurance policy, thus protecting your family.

Bank mortgage plans are strictly rental (term) plans and that’s about it. You do not have a choice.

o Our plans are traditional life insurance policies, the proceeds of which go to a named beneficiary tax free. The insurance policies are creditor proof, thus totally negating undue expenses such as probate fees.

When insurance proceeds from a bank plan are paid towards a property, those proceeds may be open to probate or creditors.

o With traditional life insurance plans, the choice of coverage amount is always yours and does not require mortgage documentations.

Again, as the coverage of bank plans relates to your mortgage balance, you do not have a choice. For instance, if you wanted an extra amount of coverage to protect your family, you would need to purchase it from elsewhere and unnecessarily end up paying an additional amount of money by way of policy fees.

o With the plans an insurance Advisor offers, the choice of using the benefit amount anyway you choose is yours, and you can make any changes as and when you need. For instance, when you die, your spouse has the option of whether he/she wishes to pay off the mortgage in its entirety or not, as per the spouse’s needs at the time.

With a bank policy the bank is the beneficiary; your family has no choice.

o Our plans are portable. They are not tied to any property. They are based on your life-not your house or any other asset.

When you purchase a mortgage insurance plan from a bank, you are confining the coverage to a particular property; hence, the moving to another property requires another contract.

o Refinancing does not affect the insurance plans that an Insurance Advisor will offer.

Refinancing alters your mortgage balance and so the contract of a bank plan stands void. There will be a rate increase in line with your current age, with additional underwriting. You in fact may not be able to get insurance again as your health conditions may have changed.

o We offer you choices of coverage ranging from 5 to 21 critical illnesses with the flexibility of purchasing the amount of coverage that you can afford. Also, you can claim two benefits separately-i.e. if the insured gets a critical illness and claims, then dies after the claim is paid, the death benefit also gets paid.

Some institutions generally add the critical illness benefit to your life insurance coverage, giving you no choice with regard to the amount you may wish to purchase according to what you can afford. It also does not allow you to claim two benefits-i.e. if you collect a claim on a heart attack which is a critical illness benefit and you survive, then the contract ends. Also, the number of critical illnesses covered is limited.

o A qualified Insurance Advisor can draw out a plan which allows you the option to stop paying premiums and still continue your policy.

Bank mortgage insurance plans are term products which have no cash values, and so, if you stop payments, the policy will immediately lapse.

o Most insurance agents will service you effectively and most of all take care of a claim, personally assisting your family when in dire need. Most Insurance Advisors’ actions will definitely speak better than bank TV commercials. They will assist you in the creation of an estate and certainly will meet you one-on-one and at your choice of venue or at your home. Basically you have hired the services of a professional in this line for the rest of the term of the plan you have purchased.

Can you recall any bank making personal contact with you such as sending you a birthday card, a calendar, newsletters, or even making a courtesy call, etc.? The only time you would hear from them is possibly at the time of renewal, which would mean an additional sale for them.

It’s worth noting that traditional life insurance policies from an Insurance Advisor offer a discount of approximately 9 per cent if the premium is paid annually, thus reducing the cost significantly. This discount factor does not arise with a bank’s mortgage insurance plans, which are generally paid on a monthly or biweekly basis.

Financial literacy is a topic that’s not very popular in mainstream education, but that does not mean that it is not important. If you are like me and lucky enough to live in a society which is by and large affluent, then you’re halfway to financial success. If you live in a developing country and you’re reading this, then you also have the opportunity to develop your financial knowledge and skills. The bottom line is that if you have an enquiring mind and have a thirst for knowledge, you can set and achieve goals by re-shifting the focus of your efforts – and here’s how.

Firstly, it’s important to recognise that what you’ve learned so far in your life has been guided by a society which wants you to work for someone else. It’s what you’ve been taught at school, at college and university, and is reinforced by your employers and society in general. It’s up to us as individuals to change our focus from settling for second best to setting and reaching achievable goals to improve our lives and that of our family. The way to do that is to reprogram our brain and shift the focus of our energy. So stop reading ‘entertainment’ magazines and watching useless programs on television which do nothing positive for us, but merely distract us from what should be our focus – a better life for us and our families.

Personally, I find that in order to reprogram my brain, I needed to change the information I was inputting. This is not a sudden or immediate thing, but is a process which takes a little time. I read a lot, and for me changing the input involved changing the types of material I read. The challenge for me was getting past the titles, which I thought were a little cheesy, but once I got past that stumbling block, I realised that what I was reading was astounding, amazing and uplifting.

I started with ‘Think and Grow Rich’ by Napoleon Hill, and Robert Kiyosaki’s ‘Rich Dad Poor Dad’. Once I read (more like devoured) these, I had the building blocks for a new attitude, a new outlook in my life, and a resource from which to develop a plan for gaining further knowledge. This came from books named in those titles, and also by going to the local library and bookstores and looking for other books around those topics. These days of course information is sourced not just from books, but there are CDs, DVDs and websites galore with information to guide and inform you.

The basic message I’m trying to get across is that change in your life is possible, no matter what your background. The key is knowledge – which as the old expression tells us is power. Once you have knowledge you have the key to unlock the secrets of building a better life. Discover what your motivation is, what drives you, then build your knowledge base in order to identify and implement the new tools which you will find at your fingertips.

A key component to retirement life success is a strong financial foundation. A sound financial footing involves both the practical matters, as well as the emotional or psychological aspects of money.

Unfortunately, with all the discussion about money in retirement planning, very little thought is given to your relation to it. It’s also never discussed how the roles you have with money changes when you retire.

The work ethic of Americans is ingrained deeply in our psyche. We all know of the history of the pioneering men and women who settled this country working by the sweat of their brow. You’ve been taught you can do or be anything you want if you’re willing to work hard enough.

When you were a young child and wanted a new toy or a piece of candy, your parents most likely told you to clean your room, take out the garbage or wash the dishes to earn what you needed to purchase the desired object. Your life as a wage earner had begun.

While an important aspect of the American identity is that of a worker and a money earner, retirement comes as welcome break. It also forces people to look at their relation to money in a new way.

A number of years ago I read Rich Dad, Poor Dad by Robert T. Kiyosaki. A primary theme of the book is most of us are financially ignorant. As a middle-class American, you’ve been brought up with a great work ethic. You’ve been instructed to work hard, spend more and indulge every whim. Most of us didn’t learn how to make our money work for us.

The change of going from being a wage earning to living off your investments, assuming you have them, is a tremendous shift. When you earned a living, you felt a sense of control over your life. When you make the transition into retirement, there is a feeling of vulnerability. You have moved from being a wage earner to being on a ‘fixed income.’

There are actually a number of dynamics at work here. The first is the shift in your identity from earning income. In our culture, there is great value placed on making your way in the world. We love the idea of pulling ourselves up from our bootstraps and making it good, regardless of where we started. There is a tendency to look down on those who aren’t able to find financial success. “What did you do wrong?” is often asked of those unable to adequately compete.

Or, we ask ourselves, “What did I do wrong that I’m not at my desired financial destination?”

This thinking has led us to value conspicuous consumption as a demonstration of success in our society. If you’ve got it, then you should flaunt. Of course, there has also been the opportunity to flaunt it whether you had achieved actual success or not. The ability to have a look of success has in recent years been more important to some than the actual achievement.

Another factor you face in your relationship to money is fear. The number one fear people have about retirement is outliving their money. Ironically, the fear exists regardless of how much money they have. The person who is worth five million dollars is just as likely to be afraid of not having enough money as the person who has one hundred thousand dollars. It’s not until people have over ten million dollars they are able to relax a bit and not worry about money.

Fears and beliefs about money play an important role in our sense of well-being. Taking the time to look at these, as well as your balance sheet will help you establish a solid financial foundation.

There are specific things you need to do with your money as you approach retirement. Not often mentioned is taking the time to look at yourself and your beliefs about money, work and its relation to your self-worth.

Credit Counseling Service is a big business these days. With more and more American consumers facing problems with amassing debt, they are turning to professional counselors in large numbers. Credit counseling services range from education about money and credit management to genuine counseling toward debt resolution, where the consumer is set off on a plan of financial action.

The main focus of credit counseling services is to assist the consumer in setting and meeting financial goals. Whether saving for a home, paying off debt, or planning for retirement, it is a personalized service which helps to lay out guidelines. In order to achieve these goals, the consumer works with a counselor either in person or online by making a comprehensive examination of the financial situation. In that initial meeting, things like income versus expenses, reasons for financial issues, and what options are available will be covered. The consumer can also expect to have discussions about lifestyle, resources and ways to decrease or increase expenses. Good credit counseling services do not judge. They are there to help the consumer.

Many will start with an online credit counseling service, and that isn’t a bad idea. By filling out forms – which should be obligation free – the consumer can determine what options are available in the state where they live as well as learning what some of the basic requirements can be. Gathering up all of the pertinent data and information is one of the first steps, and an online application will help to start to meet that requirement.

Financial education should be at the core of any credit counseling service. It may be that the consumer can learn enough through classes, reading recommended resources, and learning about consumer debts and laws that they can sort out their own financial situation if it isn’t too complicated. Many consumers are often able to head off potential life altering debt with a little knowledge and forethought. For those who are already so deeply in debt that they are seeking guidance, they will find many different types of credit counseling services. It pays to look at what each offers. Many services will push consolidation as an option, while more well-rounded ones will offer not only consolidation but debt management and debt settlement as well. There is no one solution for each and every consumer, and any credit counseling service has to be tailor made in order to work and to make a difference.

Credit counseling services can be as critical to a financial life as doctors are to health life, and they should be chosen with equal research.

Women Face Unique Financial Challenges. If you were to guess which issue women worry about most, would you guess family, health, time, stress, or maybe equal rights? According to a March 2000 gallop poll, the answer is their finances. This response may surprise you now, but consider the following list of financial issues unique to women.

Consider these results from a women-and-money incubator, and research by Bruce W. Most and William L. Anthes:

- “Women are more intimidated than men about financial issues

- Women earn less money than men

- Women are less prepared for retirement

- Women receive smaller retirement benefits

- Women live longer than men

- Women are poorer in retirement than men

- Women are more conservative investors than men”

We would also add

- Special difficulties for single mothers

- Women caring for elderly parents

- High-deductible health insurance plans cost women more

- Women may defer to men regarding financial decisions

- More women manage daily family finances

- Retirement issues because of divorce agreements

- Male-dominated financial services industry

Earnings Differences

It is a well-documented fact that women earn less than men do. A study by the American Association of University Women Educational Foundation as reported by Ellen Simon {AP}:”Women make only 80 percent of the salaries their male peers do one year after college…10 years after college, women earn only 69 percent of what men earn…Even after controlling for hours, occupation, parenthood, and other factors known to affect earnings,” the study found that one-quarter of the pay gap remains unexplained.

Most and Anthes report that “According to the U.S. Department of Labor, women working full-time, year-round, earn roughly 74 percent of what men earn… (and) workers in the age category of 45-54-the prime earning years for most people-women earned $516 a week while men earned $732.” It gets even worse for single mothers with young children whose “median income in 1998…was $14,248. This figure is the lowest among all family types, representing roughly one-fourth the median income of married-couples with children…and approximately three-fifths that of females with no children.”

Retirement Differences

Women are often less prepared for retirement than men. Most and Anthes also noted that a study that found 58 percent of baby boomer women had saved less than $10,000 in a pension or 401(k) plan, while baby boomer men had saved three times that. In addition, the fact that women live longer than men means that they need more money in their retirement than men do.

Investment Differences

Also, a 1997 study by Dryfus and the National Center for Women and Retirement Research showed that women investors were more worried than men about running out of money in old age, preferred more conservative investments, wanted fixed/steady returns, were more unnerved by stock fluctuations and worried more about investment decisions.

Social Security Retirement Differences

Of course, less money earned by women, means less money saved for retirement or contributed to Social Security benefits, and because women live 79 years on average while men live 72, women retirees are poorer in retirement than men. Most and Anthes note that according to the Administration on Aging “…half the elderly widows now living in poverty were not living in poverty before their husbands died. The picture is even worse for older women in many minority groups”.

Decision Making

The next generation of retirees may have been raised in an environment in which men handled the money decisions. More women actually pay the weekly bills, but they may have little knowledge of the larger family finances such as retirement plans, Social Security, IRAs, insurance, annuities, etc. because they may have deferred to their spouse’s decisions.

It is essential for women to understand the ‘big picture’ of their finances, especially for retirement, divorce, or death of their spouse. Because women make less than men, are less prepared for retirement, and receive smaller retirement benefits, they need to make sure that their husband’s retirement benefits will pass to them if their husband dies first. Because women may be more intimidated about asking questions of their attorney or financial advisor, they may miss crucial details (such as single-life annuity which may bring higher levels during the husband’s life but that ends when the husband dies first), or incorrect beneficiaries on life insurance policies.

Divorce

During a divorce, women may be more concerned about custody issues and keeping the house than their future retirement and may agree to forgo the 401(k). Single parenting brings a whole host of financial challenges, including lost wages from parenting responsibilities and childcare and babysitters. If the extra expenses and possibly lower income are not included in the divorce settlement, the single mother may find that she is unable to keep the house and she loses the two most valuable assets: the house and the 401(k).

Health Insurance

Women not only make less money than men, their health plan may cost more reports Mike Stobbe {AP}. When an employer changes to a high-deductible plan, it costs on average $1000/year more for women than for men due to mammograms, the cervical-cancer vaccine, Pap tests and pregnancy related services. This is unfair, but while the inequity exists, women must make an extra effort to contribute the difference to a Health Savings Account or savings program to avoid using credit to pay for the added medical bills. We have personally experienced the $4,000 deductible per year health insurance plan and, although it is better than no insurance, it can certainly make a dent in the family budget.

Care Giving

Another huge drain on women’s finances is caring for their aging parents. More women care for aging parents than men. However distasteful it may be to condense a daughter’s love for her parents into a discussion of money, this issue must be addressed so that women can prepare. Because of the aging baby-boomer population, these numbers will soon become staggering. If you add caring for young children into the mix at the same time, the financial results can be devastating.

What Should Women Do?

Because of the special issues facing women, it is crucial that women educate themselves about finances and the realities of financial gender inequity and plan for their future. The male-dominated financial services industry is just beginning to realize the unique financial planning issues for women. Make sure that your trusted advisors understand these issues and are helping you plan accordingly. Don’t be afraid to ask your advisors questions.

Summary Now is the time to begin planning for the future:

- Have a plan

- Increase your knowledge and understanding of financial matters

- Utilize trusted professional advisors to implement your plans

- Regularly monitor your progress.